Earlier this week, Stanford University’s Rock Center for Corporate Governance released a study entitled “How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making.” Not surprisingly, the 138 North American investor relations professionals surveyed prefer long-term investors so that management can focus on strategic decisionmaking without the distraction of “short-term performance pressures that come from active traders,” according to Professor David F. Larcker. Companies believed that attracting the “ideal” shareholder base could lead to an increase in stock price and a decrease in volatility.

The average “long-term investor” held shares for 2.8 years while short-term investors had an investment horizon of 7 months or less.  Pension funds, top management and corporate directors held investments the longest, and companies indicated that they were least enamored of hedge funds and private equity investors.  Those surveyed had an average of 8% of their shares held by hedge funds and believed that 3% would be an ideal percentage due to the short-termism of these investors. Every investor relations professional surveyed who had private equity investment wanted to see the ownership level down to zero.

I wonder what AstraZeneca’s investor relations team would have said if they could have participated in the survey given the various reactions by its shareholders to Pfizer’s proposed takeover. (See here and here to read about the divisions within the shareholder ranks). What would AstraZeneca’s “ideal” shareholder base look like? BlackRock, which owns 8%, is the company’s largest shareholder. Will it sway AstraZeneca’s board to reconsider its rejection of Pfizer’s bid and should it? Pfizer’s purported behind the scenes attempts to get shareholders to express their anger at AstraZeneca’s board may not be working, but this may be a prime example of why companies wish they could pick their shareholders.

As one of the study’s authors Professor Anne Beyer aptly concluded, “companies see very large, tangible benefits to managing their shareholder base, so there seems to be a real opportunity for some companies to improve corporate decisions and increase their value by paying close attention to who holds their shares.” 

 

 

 

Proxy issues are an interesting gauge of current and emerging corporate governance issues.  Even if the proposals don’t pass, they provide a tool to take investors’ and companies’ temperature on controversial issues.  Alliance Advisors issued a detailed report on 2014 proxy season trends and expectations, which is available for download here.  A few highlights are discussed below.

  • Majority Voting. A trend towards majority voting proposals with support from ISS and Vanguard means that many companies will be facing pressure to consider changes to director elections.
  • Declassified Boards.  While the Harvard Law School Shareholder Rights Project has been successful in obtaining declassification of 23 of 13 target companies, the academic and industry debate continues about the efficacy or harm of classified boards.  
  • Board Tenure & Diversity.  These initiatives seek to turn the tide against board compositions that are dominated by white men who hold director positions for extended periods of time.

“ISS’s fall policy survey revealed that 74% of investor respondents consider board service over 10 years to be problematic. Similarly, a recent academic study of S&P 1500 companies found that firm value peaks when average director tenure reaches nine years, and then drops off by as much as 10%.

***

According to a 2013 Catalyst Census of Fortune 500 companies, the percentage of board seats held by women remained flat between 2012 (16.6%) and 2013 (16.9%).”

  • Proxy Voting Mechanisms.  Shareholder activist John Chevedden is pushing proposals such as enhanced confidential voting and uniform vote reporting to reform the proxy process.
  • Social Issues.   Under this diverse category of issues, a few standouts have potential significance in the 2014 season.
  • Political Spending.  Shareholder proposals for disclosures of political spending will increase in the wake of the SEC’s decision not to pursue these disclosures as a part of its upcoming agenda.  The Center for Political Accountability has 60 proposals pending and another coalition is sponsoring 48.
  • Human Rights.  In the wake of the SEC’s attention to conflict mineral disclosures, additional shareholder proposals are expected on the issue. 
  • Climate Change.  Citing to the midterm elections and the flagging climate change reform occuring at the federal level, increased climiate change proposals are expected, many of which will employ creative strategies to apply pressure on corporations.

“As part of a broader climate strategy, social and environmental activists are challenging companies’ political activities on energy and climate change, particularly their involvement with certain trade associations and legislative groups whom the proponents feel are obstructing progress on climate-related legislation.”

-Anne Tucker

 

The New York Times ran two articles this week about administrator and executive pay that struck a chord with me.  One piece was about a new report linking student debt and highly paid university leaders.  The article discusses a study, “The One Percent at State U: How University Presidents Profit from Rising Student Debt and Low-Wage Faculty Labor.”  The study reviewed “the relationship between executive pay, student debt and low-wage faculty labor at the 25 top-paying public universities.”

Then-Ohio State President E. Gordon Gee was the highest-paid public university president for the time period review. The study found that

Ohio State was No. 1 on the list of what it called the most unequal public universities. The report found that from fiscal 2010 to fiscal 2012, Ohio State paid Mr. Gee a total of $5.9 million. [$2.95 million per year.] During the same period, it said, the university hired 670 new administrators, 498 contingent and part-time faculty — and 45 permanent faculty members. Student debt at Ohio State grew 23 percent faster than the national average during that time, the report found.

[In the interest of full disclosure, I should note that President Gee is the president of my institution, for the second time, and he’s my neighbor. He also makes considerably less money here.]

 The other article was about the health care industry, titled: Medicine’s Top Earners Are Not the M.D.s. That article reports that doctors, “the most highly trained members in the industry’s work force,” are in the middle of the pay scale for medical salaries.  The article explains: 

That is because the biggest bucks are currently earned not through the delivery of care, but from overseeing the business of medicine.

The base pay of insurance executives, hospital executives and even hospital administrators often far outstrips doctors’ salaries, according to an analysis performed for The New York Times by Compdata Surveys: $584,000 on average for an insurance chief executive officer, $386,000 for a hospital C.E.O. and $237,000 for a hospital administrator, compared with $306,000 for a surgeon and $185,000 for a general doctor.

And those numbers almost certainly understate the payment gap, since top executives frequently earn the bulk of their income in nonsalary compensation.

Is there a place where it isn’t the case that administrators make more than those actually carrying out the endeavor?  Maybe sports and entertainment, to a degree. There has been a significant change in those areas over the past 30 or so years.  Owners (and production entities) often still make tons of money, but top player salaries often dwarf those of key executives, coaches, and managers.  That was not always the case.  Take the NBA for example. The average NBA salary in 1970 was $35,000 (equal to about $207,000 today.) Today’s average salary: $5 million.  Actors and musicians take home a lot more than they used to, also, at least among those at the top. 

I am not one to bash educational administrators.  I have been one, so that may be part of it, but even before that, I appreciated that there are things that need to happen to deliver the full educational experience that are not part of the classroom.  Still, it also seems that the number of people who are there to support the delivery of services, like education and medicine, continue to grow at an absurd rate.  Even counting contingent and part-time faculty, Ohio State hired more than 1.23 new administrators for every new teacher in the test period.

As my co-blogger Steve Bradford noted yesterday regarding law school curriculum reform: 

Law faculty members can legitimately disagree about the best way to educate law students. But our goal should be to provide the best education we can, within the cost constraints we face. If professors at some law schools don’t take that responsibility seriously, we might lose students to schools focusing more on enrollment than education. If so, it’s sad for the profession, but at least we’ll go down fighting for what we know is right.

The same is true at the administrative level in law schools.  We should commit to allocating resources to administrative support that supports the educational process of preparing students for practice and for ensuring students actually get to practice, if that is what they seek.  This is often true for areas like career services, bar passage, and experiential learning. We should be educating students to be able to be good lawyers and sound professionals, but we also need to help ensure they have things they need to practice (e.g., bar admission) and the ability to practice (i.e., a job). 

Sometimes that means new administrators in new or expanded roles, but that may mean reallocating resources from one area to another rather than adding new roles.  The challenge, of course, is knowing whether the new administrative hires are delivering services that our students need or are they jobs that are serving the institution at the expense of our students.  All institutions need to make a serious attempt to answer that question because it’s not just about the number of administrators. It’s also about what those administrators do.  

Doing what’s right for our students is not always the same as doing what they want.  Still, as faculty and administrators, we also need to be clear that doing what we want is often not the same as doing what is best for our students. 

OK, where were we before the disruption of the blog?

Howard Wasserman at PrawfsBlawg has posted a comment on Justice Scalia’s recent commencement address at William & Mary. Justice Scalia argued against the proposals many have made for a two-year law degree, and argued in favor of more required courses in the second and third years. (Professor Wasserman links to the full text of Scalia’s address, if you want to read it.)

Professor Wasserman supports the general idea, but argues that enacting such reforms would put schools at a competitive disadvantage. A school with upper-level requirements would lose out to a school that offered students more flexibility. All else being equal, prospective students would choose flexibility over rigid requirements.

Professor Wasserman is probably correct. At least at the margin, students would probably prefer fewer requirements. I’m not sure how much this would affect law schools with stricter requirements, given the many other factors students consider in choosing a law school. But assume for the sake of argument that stricter curriculum requirements would put a law school at a competitive disadvantage. I don’t think that’s a legitimate reason to oppose upper-level requirements or any other reform of the curriculum.

Law faculties should require the curriculum they think best prepares students for the profession of law, competitive pressures be damned. The purpose of a law school is not to maximize enrollment. The purpose of a law school is to educate students in the law and prepare them to practice. (That does not necessarily mean focusing primarily on how-to training, but that’s an argument for another day.)

Law faculty members can legitimately disagree about the best way to educate law students. But our goal should be to provide the best education we can, within the cost constraints we face. If professors at some law schools don’t take that responsibility seriously, we might lose students to schools focusing more on enrollment than education. If so, it’s sad for the profession, but at least we’ll go down fighting for what we know is right.

Our apologies to those of you who were unable to access the blog yesterday. Our blog is hosted by Typepad, and Typepad was down all day yesterday. This had absolutely nothing to do with an alien invasion force from another galaxy. To repeat, they want us to tell you that THIS HAD ABSOLUTELY NOTHING TO DO WITH AN ALIEN INVASION FORCE FROM ANOTHER GALAXY. Please return to your daily business, earthlings.

Reuven S. Avi-Yonah recently posted Just Say No: Corporate Taxation and Corporate Social Responsibility.

He poses the question whether corporations are obligated to engage in strategic transactions solely for the purpose of avoiding taxes.  His conclusion is basically that under any theory of the firm – aggregate, real entity, or artificial entity – corporations have an affirmative obligation not to engage in overly-aggressive tax planning.

His thesis is attractive, though I’m not sure it’s entirely convincing.  He basically posits that taxes are the means by which we ensure a peaceful and civilized society, and no matter what theory of the firm one endorses, it is therefore proper for corporations to shoulder that burden.  The argument, however, would seem to encompass any form of strategic behavior – i.e., the argument would apply to all behaviors in which corporations can engage that evade the spirit of various regulations intended for the greater good of society.  If so, then it’s not clear that the argument gets us very far in terms of determining the legitimate boundaries of corporate behavior.

As of earlier this week, B Lab has now certified 1,000 entities as “certified B corporations.”

Given over 1 million entities in Delaware alone, coupled with the fact that B Lab seems willing to certify any type of entity, anywhere in the world, (if the company scores above an 80 on B Lab’s 200 point survey and pays a fee) 1,000 is a relatively small number. Every movement has to start somewhere, however.

As a side note, I have told a number of folks at B Lab that “certified B corporation” is an inappropriate name, given that they certify limited liability companies, among other entity types, but they do not seem bothered by that technicality.  I am guessing my fellow blogger Professor Josh Fershee would share my concern.   

The number of benefit corporations is more difficult to pin down, but is somewhere in the neighborhood of 400 (including public benefit corporations in Delaware and Colorado).

For the major differences between certified B corporations and benefit corporations, see here. Confusingly, both are sometimes called “B Corps.”

While the numbers are currently small, and I have critiques for some of the ways both the certified B corporation and benefit corporation movements are proceeding, I do think the larger social enterprise/social business movement is here to stay.  Therefore, in my writing, I have been attempting to find ways to improve both the certification process and the social enterprise law.  For what it is worth, I have fewer criticisms for the certification process; I think the market will sort out most of the invaluable kinks over time.  Even though I have a number of criticisms for the social enterprise laws, I think the laws may lead to some positive, society-focused norms, if the social enterprises can find a significant number of investors to go along with them.

1) I was not the only person who went to law school because I was terrified of math and accounting. Many of my students did too, which made teaching this required course much harder even after I explained to them how much accounting I actually had to understand as a litigator and in-house counsel.

2) I will always make class participation count toward the grade. Apparently paying tens of thousands of dollars a year for an education is not enough to make some students read their extremely expensive textbooks. A 20% class participation grade is a great incentive. Similarly, I will never allow laptops in the classroom. The subject matter is tough enough without the distraction of Instagram, Facebook and buying shoes on Zappos.

3) Students come to a required course with a wide range of backgrounds- some have never written a check and others have traded in stocks since they were teenagers and use Bitcoin. Teaching to the middle is essential.

4) As I suspected, when students are allowed to use an outline for an exam, they won’t study as hard or as thoroughly, and I will grade harder.

5) Never underestimate how little many students know about the basics of how businesses operate. No matter how smart they are, many students have simply had no exposure to any kind of business. For some of them it’s almost like taking civil procedure all over again in terms of difficulty. (I taught that for the first time too).

6) Balanced public policy discussions can get even the quietest students to participate. On the last day of class we debated the purpose of the corporation using benefit corporations, Citizens United and Hobby Lobby as vehicles for discussion. They did all of the readings and watched the assigned videos for class, leading to some of the richest discussion of the year.

7) Law students say they hate to work in groups, but many of them thrive and take leadership roles they wouldn’t normally assume, especially when they know that this work also counts toward their class participation grade. They also learn to take risks in small group discussion that they might not normally take in front of the whole class.

8) Using a game for a review works really well. I used a modified Jeopardy format and allowed groups to work in teams. The competitive nature of the students came out and it also provided a more interesting and lively review than the standard lecture.

9) It’s really important to match your textbook to teaching style, learning objectives and type of student.

10)  Even the most “terrified” law student can learn to like business associations. I have had several students email me to say they miss the course because they have no one with whom to discuss current business issues. That warms my heart.

There are a number of things I will change next semester. I’m looking forward to learning from more seasoned business law professors at the Emory Conference on Teaching Transactional Law in 2 weeks.

 

Joe Leahy (South Texas) recently posted an early draft of an interesting article entitled Corporate Political Contributions as Bad Faith.  He would appreciate any comments readers care to share with him.  The abstract is included below:

A shareholder who files a derivative lawsuit to challenge a corporate political contribution faces long odds, particularly when the shareholder sues under traditional theories for breach of the duty of loyalty, such as waste or self-dealing. However, there is a better theory for a shareholder to employ when filing such a lawsuit: bad faith. Bad faith is a better basis for challenging a corporate political contribution than either waste or self-dealing because bad faith is a more flexible concept than self-dealing and a less difficult standard to satisfy than waste. Even if she intends no harm, a director acts in bad faith when she (1) takes official action that is motivated primarily by any reason other than advancing the corporation’s best interests or (2) consciously disregards her fiduciary duties.

 

This Article identifies several examples of political contributions – both real and hypothetical – that are ripe for challenge as bad faith because they are made for reasons other than advancing the corporation’s best interest. For example, a CEO acts in bad faith if she causes the corporation to make a contribution in support of her own political views or a friend who is running for office. However, in the absence of a “smoking gun,” it will be difficult for a plaintiff to prove that the contribution was made for personal reasons rather than to advance the interests of the corporation.

 

To overcome the difficulty of proving motive, this Article offers a novel argument: essentially all corporate political contributions made by large, public corporations today constitute bad faith because they reflect management’s conscious disregard for shareholders’ political views. In our zero-sum, two-party political system, a board simply must know that a political contribution in support of a candidate from either major party will upset at least some shareholders. What’s more, although the duty of loyalty typically demands that management consider the best interests of the corporation as a whole, not individual shareholders, a different rule should apply to political contributions. The policy rationales for vesting decisionmaking power in the board, rather than shareholders or courts, simply do not apply to political contributions. Political matters are outside of management’s core competence and shareholders probably do not view management as a proxy for such matters. Further, political contributions differ greatly from most corporate spending, including charitable contributions. As a result, even if political contributions are not strictly ultra vires – i.e., beyond the corporate powers – they certainly verge on being ultra vires. When acting “in the vicinity of” ultra vires, the board’s authority is at its lowest ebb; consulting the shareholders is necessary to shore up that authority.

 

If failing to poll the shareholders constitutes bad faith, boards wishing to contribute corporate funds in support of political candidates might nonetheless obtain protection of the business judgment rule in two ways. First, the board could submit a non-binding resolution to the shareholders at each annual meeting to gauge shareholder support for political contributions to each major party. Second, management could establish a good faith reason for not consulting the shareholders for a specific contribution – for example, it directly and unambiguously promoted the corporation’s core business.

This article follows on Professor Leahy’s related forthcoming Missouri Law Review article Are Corporate Super PAC Contributions Waste or Self-Dealing? A Closer Look.